Abstract
Readers could discover my earlier protection through this hyperlink. My earlier ranking was a maintain as I believed FIGS (NYSE:FIGS) working metrics would enhance as its present momentum was sustainable. I’m reiterating my maintain ranking for FIGS as its third quarter consequence confirmed continued progress and energy in its enterprise, the place its income and web earnings margin all grew double digits.
Valuation
Primarily based on my view of the enterprise, I anticipate 8% progress in FIGS’s income for FY23 and FY24. This projection is predicated on Administration’s income steerage of single-digit progress. The driving force and elements behind this steerage are because of the continued macroeconomic uncertainty comparable to inflation and the central financial institution’s rate of interest route. As well as, the third quarter’s efficiency is likely to be a results of pull-forward demand. It refers to a state of affairs the place customers make purchases sooner than they usually would. This could occur on account of anticipated value will increase on account of present uncertainty concerning inflation and the route of inflation within the close to future.
At present, inflation hovers round 3.7%, nonetheless manner above the focused and wholesome charge of two%. Though inflation has come down considerably because the begin of 2023, it began to take a flip round July and inflected. In consequence, the pull-forward demand may worsen for the upcoming quarters and prolong into 2024, given the truth that nobody can predict the motion of inflation.
Friends overview:
FIGS now commerce at 1.6x ahead income, which is greater than friends’ medians of 0.70x. The drivers for the upper ahead income are FIG’s far superior margins and 1-year income progress outlook. By way of gross margins, FIGS is at ~69%, whereas friends’ median is 45.66%. By way of web margins, FIGS web margin is ~2.9%, whereas friends are 1.75%. The final however most important is FIGS’s income progress outlook. In 2023, FIGS is anticipated to develop at 8%, whereas friends are at 3%. That’s greater than double of them. With a greater progress outlook and margins, I feel it is honest for FIGS to be buying and selling at a better P/E.
With my goal value nearing its present traded value, the upside potential will not be enticing sufficient. Which means that the market has already priced the energy of FIGS into its share value. On the again of those analyses, I keep my maintain ranking for FIGS.
Feedback
FIGS reported robust third quarter 2023 outcomes. In comparison with $128.6 million within the 2022 third quarter, web revenues elevated 10.7% to $142.4 million for the third quarter of 2023. This improve was principally attributable to a better common order worth [AOV] and a rise in orders from each new and current clients. In that quarter, lively clients elevated by 19.6%, which was made doable by FIG’s persistent efforts to lift model consciousness globally and excessive charges of lapsed buyer reactivation.
Shifting onto AOV, it grew by ~2% within the third quarter year-over-year. This improve was principally pushed by greater items per transaction [UPT] and, to a lesser extent, by a rise in common unit retail [AUR]. AOV continues to be benefiting from the change within the product combine, which is generally because of the reputation of outerwear and footwear. Non-scrub put on classes, comparable to footwear and limited-edition types, are rising robustly. Non-scrub put on elevated 26.4% to 19.3% of web revenues within the third quarter of 2023, in comparison with 16.9% for the third quarter of 2022.
On the floor, it’d appear to be FIGS is dealing with stress on its margins, because it reported contractions in gross margins. The third-quarter gross margin was 68.4%, versus 70.6% in 2022. The first reason for the decline was a shift within the product combine. Nonetheless, once we dive deeper into the decision, FIGS demonstrated wonderful price administration. Within the third quarter, promoting bills reported have been $32.2 million, or 22.6% of web revenues, versus 24.8% in 2022. Decrease fulfilment prices and leverage inside transport bills have been the drivers of the decline. As a result of improved digital advertising effectivity, the third quarter’s advertising bills have been $19 million, or 13.4% of web revenues, down from 15.6% in 2022. Though gross margin contracted, FIGS efficient price administration drives its third quarter web earnings margin to broaden to 4.2% in comparison with 3.1% for final yr.
Shifting to my outlook for FIGS, I anticipate that FIGS might be underneath stress from the present unsure and hard macro setting. My perspective aligns with that of administration. Beginning with the highest line, FIGS initiatives single-digit web income progress within the fourth quarter, reflecting continued macroeconomic uncertainty and acknowledging that, given the third quarter’s outperformance, there could have been some pull ahead in demand. They anticipate that, till no less than the primary half of 2024, the macroenvironment will proceed to have an effect on customers. Relating to gross margin for the fourth quarter, FIGS anticipates {that a} change within the mixture of merchandise and promotions will steadiness out improved freight prices. Due to this fact, I don’t foresee any strengthening or weakening of its gross margins. Lastly, FIGS anticipate that the preliminary start-up prices for its fulfilment enhancement venture will come to about $2 million. It’s anticipated that these excessive bills will persist by way of the primary three quarters of 2024. From these, I can infer that margins might be dealing with stress when FIGS report its 2024 numbers, as they’ve already warned us.
Threat & conclusion
One upside danger to my maintain ranking can be the chance that FIGS’s progress and margin beat the optimistic expectations which might be guided by administration. Within the present difficult setting, FIGS proceed to develop its income within the third quarter of 2023. On high of that, it additionally manages to scale back its working bills and broaden its web margins, regardless that inflation is excessive. This speaks volumes about FIGS’s enterprise mannequin in addition to its price administration effectiveness. On this situation, FIGS P/E may broaden, which results in share value appreciation.
In conclusion, FIGS’s third quarter result’s sturdy and spectacular. Its income grew by double digits regardless of a difficult macroeconomic panorama suffering from excessive inflation and rate of interest hikes. Though the gross margin compressed barely, this didn’t negatively impression its backside line. As a result of its wonderful and environment friendly price administration, FIGS as an alternative managed to broaden its web earnings by 1.1% to 4.2% for the third quarter of 2023. For my part, that is very spectacular given the truth that excessive inflation has typically elevated most corporations prices and contracted their margins. Lastly, when in comparison with friends, FIGS surpass and outshines all of them by way of margins and progress outlook. Nonetheless, the dearth of a beautiful share value beneficial properties leads me to take care of my maintain ranking for FIGS.